A measure of the social justice of a society is the treatment of children. Many a conservative or libertarian in the United States assert that poor adults are responsible for their own plight — having brought their situation on themselves by not working as hard as they could. (That assumes, of course, that there are jobs to be had — an increasingly dubious assumption.)

But the well-being of children is manifestly not a matter for which children can be blamed (or praised). Only 7.3 percent of children in Sweden are poor, in contrast to the United States, where a startling 23.1 percent are in poverty. Not only is this a basic violation of social justice, but it does not bode well for the future: these children have diminished prospects for contributing to their country’s future.

Discussions of these alternative models, which seem to deliver more for more people, often end by some contrarian assertion or other about why these countries are different, and why their model has few lessons for the United States. All of this is understandable. None of us likes to think badly of ourselves or of our economic system. We want to believe that we have the best economic system in the world.

Part of this self-satisfaction, though, comes from a failure to understand the realities of the United States today. When Americans are asked what is the ideal distribution of income, they recognize that a capitalist system will always yield some inequality — without it, there would be no incentive for thrift, innovation and industry. And they realize that we do not live up to what they view as their “ideal.” The reality is that we have far more inequality than they believe we have, and that their view of the ideal is not too different from what the Nordic countries actually manage to achieve.

Among the American elite — that sliver of Americans who have seen historic gains in wealth and income since the mid-1970s even as most Americans’ real incomes have stagnated — many look for rationalizations and excuses. They talk, for instance, about these countries’ being homogeneous, with few immigrants. But Sweden has taken in large numbers of immigrants (roughly 14 percent of the population is foreign-born, compared with 11 percent in Britain and 13 percent in the United States). Singapore is a city-state with multiple races, languages and religions. What about size? Germany has 82 million people and has substantially greater equality of opportunity than the United States, a nation of 314 million (although inequality has been rising there, too, though not as much as in the United States).

It is true that a legacy of discrimination — including, among many things, the scourge of slavery, America’s original sin — makes the task of achieving a society with more equality and more equality of opportunity, on a par with the best performing countries around the world, particularly tricky. But a recognition of this legacy should reinforce our resolve, not diminish our efforts, to achieve an ideal that is within our reach, and is consistent with our best ideals.

NICOSIA—Furious MPs took turns in parliament Tuesday to rail against the harsh terms of a bailout aimed at saving Cyprus from bankruptcy, decrying the eurozone “blackmail” as the deal hammered out at the weekend appeared to be unraveling.

Outside parliament equally angry crowds called for a “No” vote and held up signs warning that other financially crippled European nations like Italy and Spain could be next.

It was unclear if a vote on the measure would go ahead, however, after the ruling Disy party of President Nicos Anastasiades said it would abstain, and Sigma private television reported all other parties would also not take part.

The emergency session of parliament came soon after International Monetary Fund chief Christine Lagarde urged Cyprus to meet its commitments under the 10-billion-euro ($13 billion) deal sealed with eurozone partners on Saturday.

“It’s time to deliver,” Lagarde told a financial congress in Frankfurt.

But parliamentary speaker Yiannakis Omirou, of the socialist Edek party, told deputies, “There can only be one answer: no to blackmail.”

“Our demand must be that this deal must be renegotiated. If we pass this tax there will be no foreign investor who will keep their money here,” he warned.

Under the deal, a controversial levy of at least 6.75 percent was to be slapped on all bank deposits across the island.

But the parliamentary finance committee, in a bid to make the package more palatable, Tuesday dropped the tax on bank savings below 20,000 euros, while retaining at 6.75 percent the levy on deposits of 20,000-100,000 euros and at 9.9 percent for amounts above 100,000 euros.

The changes prompted a warning by Central Bank governor Panicos Demetriades that the bailout deal could collapse as it will now no longer “yield the estimated 5.8 billion euros agreed by the eurogroup.”

“If we secure 5.5 billion it will be considered in breach of the agreement and perhaps will not be accepted,” Demetriades told the finance committee, as cited by the Cyprus News Agency.

Conservative President Anastasiades was hoping to push for a vote during an emergency parliamentary session on Sunday but faced with fury at home the vote was pushed to Monday and then rescheduled for Tuesday.

With no end in sight to the crisis, Europe’s main stock markets suffered further losses and the euro slid on Tuesday.

In foreign exchange activity, the European single currency slid to $1.2873, from $1.2957 in New York late on Monday, to hit its lowest level since November 22.

The president had even before the session began called an emergency meeting of party leaders for Wednesday morning to “examine alternative plans to address the situation that may arise following developments determined by the parliamentary vote”.

Fearing a run on accounts, Cyprus has shut its banks until at least Thursday, with the local stock exchange closed for the same period.

A government spokesman said Anastasiades would have further telephone discussions on the terms of the bailout with German Chancellor Angela Merkel later Tuesday, after a first round of talks on Monday.

As the island leaders raced to stave off bankruptcy, Finance Minister Michalis Sarris was on his way to Moscow to seek an extension to an existing Russian loan.

Finance ministry director Andreas Charalambous told reporters that securing an extension to the loan was “very important” as it would throw Cyprus a lifeline.

“The first issue is we have a large loan maturing in 2016 and if we manage to come to an understanding this will help facilitate our debt repayments and debt sustainability,” Charalambous said.

“If we manage to extend the loan the refinancing needs of the economy would be manageable. So it’s very important.”

“There are other options the minister is going to discuss with the Russian government and investors as our ambitions are going beyond the extension of the loan. We will see if there is potential interest for further investment,” Charalambous added without elaborating.

Moscow extended Nicosia a 2.5-billion-euro loan in 2011 at a rate of 4.5 percent.

Sarris’s goal was to lower that rate and extend the loan’s expiration date until 2020 from 2016, reports said.

But talks were likely to be awkward given the levy demanded by the EU—Russians have billions of euros deposited in the island’s banks.

Estimates vary but the Moody’s rating firm estimates that Russian companies and banks keep up to $31 billion in Cyprus, which accounts for between a third and half of all Cypriot deposits.—Charlie Charalambous

Singapore realized that an economy could not succeed if most of its citizens were not participating in its growth or if large segments lacked adequate housing, access to health care and retirement security. By insisting that individuals contribute significantly toward their own social welfare accounts, it avoided charges of being a nanny state. But by recognizing the different capacities of individuals to meet these needs, it created a more cohesive society. By understanding that children cannot choose their parents — and that all children should have the right to develop their innate capacities — it created a more dynamic society.

Some argue that all of this was possible only because Mr. Lee, who left office in 1990, was not firmly committed to democratic processes. It’s true that Singapore, a highly centralized state, has been ruled for decades by Mr. Lee’s People’s Action Party. Critics say it has authoritarian aspects: limitations on civil liberties; harsh criminal penalties; insufficient multiparty competition; and a judiciary that is not fully independent. But it’s also true that Singapore is routinely rated one of the world’s least corrupt and most transparent governments, and that its leaders have taken steps toward expanding democratic participation.

Democracy, we now recognize, involves more than periodic voting. Societies with a high level of economic inequality inevitably wind up with a high level of political inequality: the elites run the political system for their own interests, pursuing what economists call rent-seeking behavior, rather than the general public interest. The result is a most imperfect democracy. The Nordic democracies, in this sense, have achieved what most Americans aspire toward: a political system where the voice of ordinary citizens is fairly represented, where political traditions reinforce openness and transparency; where money does not dominate political decision-making; where government activities are transparent.

I believe the economic achievements of the Nordic countries are in large measure a result of the strongly democratic nature of these societies. There is a positive nexus not just between growth and equality, but between these two and democracy. (The flip side is that greater inequality not only weakens our economy, it also weakens our democracy.)

These are the most salient points here, and I agree with all of them.

America and the American-like countries of Europe really haven't gotten it yet.

BERLIN — Lawmakers in Cyprus on Tuesday rejected a bailout plan that would have rescued the country’s banks but forced savers to chip in for the cost, throwing down a gauntlet to the rest of Europe over the financial fate of the tiny island nation.

The plan to save Cyprus’s collapsing banks but to charge depositors for the service proved so controversial that not one of the 56 members of Cyprus’s parliament voted for it Tuesday evening. The rejection leaves the fate of rescue plans up in the air, with other European leaders so far unwilling to step in to save Cyprus, where bank deposits tower over the rest of the economy.

The rejection leaves Cyprus, the International Monetary Fund and the rest of Europe in a standoff familiar from previous bailout negotiations, with the country trying to navigate its local politics and possibly get a better deal for itself as the others stand firm on how much they want to commit to yet another troubled euro-zone nation.

The fate of the 17-nation currency union, meanwhile, again hangs in the balance, threatened by a country that constitutes just 0.2 percent of the zone’s collective economy. Throughout the crisis, European policymakers have tried to keep any country from leaving the euro. Losing a member nation would pose uncertain risks to the world financial system and be politically embarrassing to the major powers such as Germany and France that designed the currency union.

Overall, Cyprus needs about $20 billion — an amount equal to its annual economic output and a sum that, if all borrowed, would throw the country’s finances onto unsustainable footing. The IMF’s internal rules do not allow the fund to make loans to the country under those circumstances. Euro-zone countries are hesitant to lend the full amount, as well.

As a consequence, the fund, the euro zone and the European Central Bank want to cap the amount of international loans to Cyprus at about $12.5 billion and leave the country to come up with the rest. The deposit tax was one alternative for raising the money. It had the advantage of grabbing $2.2 billion to $3 billion from foreigners, many of them Russian, who own more than one-third of the money on deposit in Cypriot banks.

In a sign of the severity of the situation, Britain on Tuesday dispatched a military plane loaded with a million euros to Cyprus “as a contingency measure” for soldiers stationed at British bases in the Mediterranean country, in case they are not able not access their savings in Cypriot banks, according to a British Defense Ministry spokesman.

Other options could exact more from local families and businesses through government spending cuts or taxes, even if they avoid the direct hit on savings accounts. Euro-zone countries could also relent and lend more, though that would be politically sticky at home.

The IMF did not have any immediate comment on the Cyprus vote. IMF managing director Christine Lagarde has endorsed the existing proposal as one that “appropriately allocates” the costs of the country’s financial rescue.

The plan rejected Tuesday would have left deposits under $26,000 unscathed, foisted a one-time 6.75 percent tax on deposits between $26,000 and $129,000, and taxed deposits above that at 9.9 percent.

The latest turmoil is a potent reminder of the fragility of the financial situation in Europe, where troubles at its periphery have threatened for the past three years to spread to some of its largest economies.

Cypriots have been lining up to take cash out of automated tellers as fast as the machines can be loaded, and a Monday bank holiday was extended through the end of Wednesday to prevent a broader run on deposits.

Anastasiades’s office said he would speak to German Chancellor Angela Merkel by phone Tuesday to update her on the situation in his country. The pair also spoke Monday. Anastasiades planned to hold an emergency meeting of Cypriot political leaders Wednesday morning to discuss what to do next.

Wealthy Russians have long flocked to Cyprus as an offshore banking haven, and many European officials suspect it is a hub for money laundering, a conclusion reached in a report by Germany’s foreign intelligence service that has circulated widely in Berlin.

The plan that was rejected would have forced Cyprus to abandon its guarantees on deposits of up to $130,000, a stunning new precedent in Europe’s three-year-long economic crisis. Many analysts and officials said Cyprus should have simply honored those guarantees and concentrated the burden on larger deposits. But Cyprus has been loath to imperil its status as a financial center. Cypriot Finance Minister Michalis Sarris flew to Moscow on Tuesday afternoon to talk with furious Russian leaders about the implications for their citizens’ deposits.

“They needed to make a trade-off between having any future as a financial center and appearing to be fair and progressive to their own citizens,” said Sony Kapoor, the managing director of Re-Define, a Brussels-based think tank. “I think they possibly made the wrong decision there. And that has poisoned the air.”

In rejecting the rescue plan, Cypriot lawmakers appeared to be gambling that European governments would soften their stance. But in Germany, whose Parliament must approve any bailout, lawmakers of all stripes were lining up Tuesday to oppose any concessions. Their resolve may have been bolstered by markets, which were down only modestly Tuesday despite the unease. The euro dropped 0.5 percent against the dollar, to $1.289.

BERLIN — Fears of renewed economic crisis in Europe flared Monday as officials took the unprecedented step of targeting bank deposits in Cyprus to help rescue the country’s ailing financial system.

The proposal to tax all bank deposits, which requires approval by Cyprus’s parliament, led depositors to empty ATMs over the weekend and raised questions about whether the precedent could upset Europe’s banking system more broadly. By taxing all deposits, even those covered by government deposit insurance, the plan slaps at an important presumption of modern banking — that small accounts in publicly insured institutions are safe.

The proposal upset world markets, led Cyprus to keep its banks shuttered until Thursday while its parliament debates the deposit tax, and prompted an angry backlash from Russian President Vladi*mir Putin. Russians have tens of billions of dollars at risk in the island nation — some of it representing legitimate investment, some of it laundered from illegal enterprises, some of it an effort to avoid Russia’s own political uncertainties.

Putin called the tax “unfair, unprofessional and dangerous” — unusually sharp opposition by a major power to a bailout program vetted by European leaders and the International Monetary Fund.

European officials endorsed the plan at a weekend meeting, and IMF managing director Christine Lagarde said it “appropriately allocates” the costs of bailing out Cypriot banks.

The situation in Cyprus is a potent reminder of how the political economy of the euro zone remains volatile. Though many analysts feel the worst of Europe’s crisis has passed, the prospect of a nation being forced from the currency union remains a possibility and carries an uncertain set of risks.

The United States has little direct exposure to Cyprus. A statement from the U.S. Treasury Department said officials were watching the situation closely and urged “that Cyprus and its Euro area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”

World markets dropped modestly Monday and the euro fell against the dollar, but analysts said the real costs may come later if depositors in struggling countries such as Spain and Italy question whether their money is safe in their banks.

Options are few

Bank depositors have been spared in the euro zone’s other bailouts, though other classes of asset holders and investors have suffered officially sanctioned losses — including owners of Greek government bonds, and bank stockholders in Ireland and Spain. Outside the euro zone, foreign depositors were wiped out in Iceland’s 2008 banking crash.

Jacob Funk Kirkegaard, an analyst at the Peterson Institute for International Economics, noted that Cyprus, the IMF and other international creditors had few options. The country’s banking problems are so deep that the Cypriot government could not afford the loans needed to fix them. And within Cyprus’s banks, deposits are the only pool of money large enough to raise the $7.5 billion international lenders want Cyprus to contribute to a roughly $20 billion total bailout.

Bank deposits in the country are eight times the size of the economy, and European officials have long felt that low taxes and light regulation in Cyprus have created a money-laundering hub used by affluent Russians. In wealthier European nations such as Germany, Finland and the Netherlands, there is little political support to use their taxpayers’ money to protect the accounts of Russian or other outside investors — particularly given the wide suspicion that some of the money represents the proceeds of illicit activity.

Cyprus is a “special case,” Steffen Seibert, a spokesman for German Chancellor Angela Merkel, told reporters Monday. It has “no parallels with other countries and therefore no impact on them.”

Under the proposal, bank deposits of more than 100,000 euros, or about $130,000, would be taxed at 9.9 percent. Deposits under $130,000 would be taxed at 6.75 percent, even though the government of Cyprus had issued deposit guarantees, similar to those from the U.S. Federal Deposit Insurance Corp., up to that level.

Cyprus’s banks sustained a heavy hit when they were forced to write off large portions of their loans to Greek banks and holdings of Greek government bonds as part of a bailout of that country last year.

“We are living through the most tragic moments since 1974,” when Cyprus was invaded by Turkey, Cypriot President Nicos Anastasiades said late Sunday in an address to the country.

On Monday, Cypriot lawmakers were discussing a new proposal that would lower the burden on smaller depositors and raise it on larger ones.

But the damage may have been done.

“I really think it’s a disaster,” said Clemens Fuest, the president of the Center for European Economic Research in Mannheim, Germany, and a top adviser to the German Finance Ministry. “This is quite nasty and it’s quite hard to understand, because it really is a blow to the entire project of a banking union” that the euro zone is trying to create — in part to ensure that banking problems do not overwhelm national governments.

Gary Jenkins, managing director of Swordfish Research, said that “if in 12 months’ time, normal people in Spain or Italy see some kind of bailout headlines and they remember that depositors in Cyprus lost their money, they’re going to take out their money.”

Russian stakes

Cyprus, whose economy is just 0.2 percent of the 17-nation euro zone, took a $3.3 billion loan from Russia in 2011 to avoid resorting to a European and IMF bailout.

Wealthy Russians have flocked to Cyprus since the 1991 breakup of the Soviet Union, attracted by the prospect of socking their money away from the prying eyes of Russian finance officials. About $19 billion in Russian deposits is in Cypriot banks, according to Moody’s estimates. Cyprus’s attractiveness as a financial hub increased after it joined the European Union in 2004, a move that was seen as further increasing its political and financial stability. The island has about 1.1 million people, but the territory controlled by the Cypriot government has 840,000 residents. Turkish Cypriots control the northern part of the island.

German Finance Minister Wolfgang Schaeuble said late Sunday that the decision to spread the losses across all depositors in Cyprus was a decision made by Cypriot policymakers, not those outside the country.

“We were in need of a certain sum” from deposits, Schaeuble told ARD television. “If going very high in charging large investors was to be prevented, the sum would only be reached if it were produced over a broad range” of depositors.

If Cyprus rejects the bailout altogether, he said, “the banks in Cyprus are bankrupt, and Cyprus will be in a very difficult situation.”

Goldman Sachs and JPMorgan get the go-ahead from the Federal Reserve for their capital plans - but with conditions.

Correction: March 15, 3:55 PM.

FORTUNE -- The Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks on Thursday as part of the final leg of their required stress tests.

Ally Financial, the former finance arm of General Motors (GM), and BB&T (BBT), a regional bank based in Winston-Salem, N.C., will be barred from increasing any distributions of capital to investors. Last week, the Fed said that Ally didn't have enough capital to survive an economic downturn.

In addition, Goldman Sachs and JPMorgan Chase, two banks that emerged from the financial crisis among the strongest in the nation, appeared to stumble in this year's test. The Fed said it has concerns with the capital plans of those two banks. Goldman (GS) and JPMorgan (JPM) will still be allowed to buy back stock and pay dividends, but they will have to resubmit their capital plans by the end of September to address the central bank's concerns. The Fed declined to say what those concerns were.

Still, the stress test showed, once again, that the nation's largest banks are in far better shape than they were going into the financial crisis, and better than even a year ago. Nearly every bank submitted a plan to the Fed to increase their dividend or buy back shares. Both moves generally boost share prices and are cheered by investors but can deplete needed capital to cover losses from loans or bad investments. Banks used to be able to up these payouts without much oversight. But one of the changes since the financial crisis is that banks now have to get these distribution plans approved by the Fed each year.

Despite the Fed's concerns, JPMorgan said it planned to increase its dividend to $0.38 a share, from a current $0.30, in the second quarter. It also said it planned to buy back $6 billion worth of its own stock in the next year. The firm declined to say what issues the Fed had with its capital plan, but it said it planned to address the issues and resubmit its plan. "JPMorgan Chase is fully committed to meeting all of the Fed's requirements," said CEO Jamie Dimon in a statement.

Bank of America (BAC) said it plans to repurchase $5 billion worth of stock in the next year. The firm will purchase an additional $5.5 billion worth of preferred shares. Still, BofA said it has no plans to boost its dividend from its current $0.01 a share in the next year.

Wells Fargo (WFC) said it plans to up its dividend to $0.30 a share in the second quarter, up from $0.25 for the first quarter, and $0.22 a year before. The firm also said it plans to increase its share buybacks in 2013, but it didn't say by how much. Last week, Citigroup (C) said it planned to repurchase $1.2 billion worth of its shares. Goldman could not be reached for comment.

The financial health of JPMorgan and Goldman didn't appear to significantly differ from than that of Morgan Stanley (MS). Morgan Stanley's capital plan was approved without any conditions. It said the Fed had approved it to buy the remaining 35% of Citi's former brokerage unit Smith Barney that Morgan Stanley doesn't already own.

A Fed official said that the issue with Goldman and JPMorgan may have had to do with the differences in what the two banks thought they would lose in a severe economic downturn and what the Fed had projected. Goldman, for instance, said it would lose $6.6 billion. The Fed estimated $20.5 billion.

"The financial crisis showed not only that regulators needed to increase capital requirements and conduct regular stress tests, but also that firms need strong internal processes to evaluate their own capital needs based on their individual risks and circumstances," said Fed governor Daniel Tarullo.

The biggest surprise was the rejection of BB&T's capital plan. BB&T passed the first round of the Fed's stress test last week and seemed to have more than enough capital to survive a severe economic downturn. But the Fed said Thursday it has significant issues with the qualitative parts of the bank's capital plan. It did not say what those issues were.

Another surprise was the fact that American Express (AXP) could have had its plan rejected. According to the Fed, the capital plan that American Express initially submitted would have caused the bank to fall below the Fed's minimum capital requirements. American Express revised its plan this week, presumably cutting how much capital it would distribute to shareholders in dividends or share buybacks. That plan wound up getting approved.

Correction: An earlier version of this story said that Ally and BB&T would not be allowed to pay any dividends. In fact, the banks are allowed to pay the dividends they already promised to shareholders. They are not allowed to make increases.

Federal Reserve says 17 of the nation's 18 largest banks could survive a severe economic meltdown.

FORTUNE -- In its annual stress test of the nation's largest banks, the Federal Reserve estimated that these firms would lose $462 billion dollars if the economy were to enter another recession similar to the one we just had.

Despite those losses, though, the Fed says nearly all of these banks would survive.

Of the 18 banks tested by the Fed, only Ally Financial, the former finance arm of General Motors (GM), would sustain big enough losses to potentially put it out of business. All of the other banks would have enough capital to make it through.

But the Fed found that a key ratio of financial health for Goldman Sachs (GS) and Morgan Stanley (MS) would drop to a level that is only slightly above what the Fed considers acceptable.

Another surprise? Citigroup (C), which has struggled since the financial crisis and recently named a new CEO, was deemed the most prepared to weather another recession among the nation's six largest banks. Citi was followed by Wells Fargo (WFC) and Bank of America (BAC).

JPMorgan Chase (JPM), which is generally thought to be the strongest of the nation's big banks, came out only ahead of Goldman and Morgan Stanley. It also was projected to have the biggest losses of the 18 biggest banks ... at just over $77 billion.

Still, the Fed said the government bailout of the financial sector and other measures taken by the banks themselves have made them significantly better prepared for a downturn than they were before the financial crisis.

The Fed did its stress test by looking at how much the banks could stand to lose in their loan portfolios and trading books under an adverse economic scenario. The scenario included a rise in the unemployment rate to 12%, a 50% drop in the Dow Jones industrial average and a 21% drop in housing prices.

After estimating those losses, the Fed then figured how much capital a bank would have left as a percentage of its remaining loans and investments. The Fed generally deems a bank healthy if it has enough capital to cover a 5% drop in its assets. At the worst of the financial crisis, the average so-called capital ratio at the largest banks dropped to 5.6%. But the Fed said the average capital ratios of the big banks would only dip to 7.4% in its most recent stress test.

"Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty," said Federal Reserve governor Daniel Tarullo in a release about the stress test.

The release of the results is only the beginning. Next week, the Fed will announce whether or not to approve plans by big banks to increase dividends and buy back more stock.

Steven Pearlstein is a Washington Post business and economics columnist and a professor of public and international affairs at George Mason University.

Careening from debt-ceiling crisis to sequestration to a looming government shutdown, the nation is caught up in a historic debate over the proper size and role of government.

That’s certainly one way to think about it. Another is that we are caught up in a historic debate over free-market capitalism. After all, if markets were making most of us better off, regulating their own excesses, guaranteeing equal opportunity and fairly dividing the economic pie, then we wouldn’t need government to take on all the things it does.

For most of the past 30 years, the world has been moving in the direction of markets. The grand experiment with communism has been thoroughly discredited, a billion people have been lifted from poverty through free-market competition, and even European socialists have given up on state ownership and the nanny state.

Here at home, large swaths of the economy have been deregulated, and tax rates have been cut. A good portion of what is left of government has been outsourced, while even education is moving toward school choice. In embracing welfare reform, Americans have acknowledged that numerous programs meant to lift up the poor instead trapped them in permanent dependency and poverty.

But more recently, we’ve seen another side of free markets: stagnant incomes, gaping inequality, a string of crippling financial crises and 20-somethings still living in their parents’ basements. These realities are forcing free-market advocates and their allies in the Republican Party to pursue a new strategy. Instead of arguing that free markets are good for you, they’re saying that they’re good — mounting a moral defense of free-market capitalism.

Many of those leading this intellectual campaign can be found here in Washington. Arthur Brooks, the president of the conservative American Enterprise Institute, and John Allison, the successful banker installed last summer as head of the libertarian Cato Institute, have both recently published books laying out the moral case against the modern welfare state and for even-freer-market capitalism than we have now.

As they see it, regulation is an infringement of individual liberty, while income redistribution, in the form of a progressive tax-and-transfer system, is nothing more than thievery committed against the most talented and productive by those who are not. Regulation and redistribution, they contend, also undermine the vital incentives that drive capitalism, which throughout history has been the best system for freeing large masses of human beings from lives of misery and poverty. What could be more moral, they ask, than that?

The seeds of this moral defense of free markets were planted by John Locke, Adam Smith and Ludwig von Mises, but they blossomed in America in the writings of the Russian emigre Ayn Rand, whose novels “The Fountainhead” and “Atlas Shrugged” are mandatory reading among right-leaning intellectuals and politicians. Where Rand once saw a world divided between “producers” and “moochers,” today’s conservatives see “makers” and “takers.” Where she warned of an America about to descend into totalitarian slavery, they warn of a slide into socialist egalitarianism, special-interest kleptocracy and innovation-snuffing political correctness.

Politically, this new moral offensive got off to a rough start. Republicans tried to make “We built it” a central theme of the 2012 campaign, capitalizing on President Obama’s awkwardly-put argument that it takes public infrastructure to create successful businesses. But that message was soon drowned out by the controversy over Mitt Romney’s videotaped complaint about the 47 percent of Americans who, by paying no taxes and relying on government handouts, have become wards of the welfare state. Americans recoiled at the elitism and lack of empathy in the candid remarks to wealthy donors, and even Romney recently admitted to Fox News that the comments “did real damage to my campaign.”

Now Obama has taken up the conservatives’ moral challenge in pressing for budgetary and tax fairness. If they mean to have a war over morality, the president seems to be saying, then let it begin here.

We should welcome this debate. In fact, a big reason our political stalemate has lasted so long, I suspect, is that we’ve failed to grapple with these big, important questions. Unfortunately, many of the arguments have been a bit flabby, with both sides taking refuge in easy moralizing.

The conservative case against regulation, for example, is premised on the proposition that everything that has gone wrong with the markets is the government’s fault. That’s the explanation for the recent financial crisis offered by Allison, who, before taking over at Cato, built BB&T from a local bank into a regional powerhouse. Allison’s culprits are the Federal Reserve, federally chartered Fannie Mae and Freddie Mac, federal deposit insurance, and misguided bank regulations designed to make credit available to low-income households.

I asked Allison recently about mortgage bankers who made lousy loans that they knew would go bad, and investment bankers who knowingly packaged them into securities, and ratings agencies that gave them their seal of approval. His explanation was that once a misguided government provided the wrong incentives and opportunities, such profit-maximizing behavior was to be expected in a market system — a system that eventually would have punished those who were misguided or unethical if the government hadn’t foolishly bailed them out.

Note the Gordon Gekko-like logic here: Because pursuit of self-interest is the essential ingredient in a market system, it somehow follows that individuals and firms are free to act as greedily and selfishly as they can within the law, absolved from any moral obligations. And it’s not just in the movies. The same amorality was on display at those Senate hearings in 2010 where Fabrice “Fabulous Fab” Tourre and the team from Goldman Sachs tried to explain to incredulous lawmakers why it was perfectly reasonable to peddle securities to clients that they had deliberately constructed to default.

Free-market advocates have a stronger moral case against government “confiscating” the money earned by one person to give it to another.

The traditional liberal defense of redistribution, of course, is that a lot of what passes for economic success derives not only from hard work or ingenuity but also from good fortune — the good fortune to be born with the right genes and to the right parents, to grow up in the right community, to attend the right schools, to meet and be helped by the right people, or simply to be at the right place at the right time. A market system should reward virtue, they argue, not dumb luck.

The American spin on the luck problem is “equal opportunity, not equal outcomes” — offering a leg up to those who are disadvantaged through no fault of their own. While that may sound right to most of us, the practical and moral challenge comes in figuring out which disadvantages to compensate for and how much.

Given the importance of education to economic success, for example, we’ve come to believe it only fair that everyone gets a basic education. But does that moral imperative extend only to grades K-12, or should it also include preschool, as Obama has recommended? What about college or graduate school? And are we willing to take the equal*opportunity argument so far as to deny wealthy families the liberty to buy their children what they and others believe to be a superior private-school education? Apparently not.

One problem with liberals’ equal* opportunity argument is that they have yet to articulate the moral principles with which to determine how far the evening-up should go — not just with education but with child care, health care, nutrition, after-school and summer programs, training, and a host of other social services.

Similar questions arise over safety-net programs for the poor, which all but the most dogmatic conservatives feel some moral instinct to provide. What should be the height of the net and the tightness of its weave? Who should be entitled to its protections, and for how long?

Such questions get lost in today’s debate, which is focused on fiscal benchmarking against current spending rather than moral benchmarking against agreed-upon principles. Liberals often offer a pretty good imitation of the caricature that conservatives paint when they reflexively declare that whatever we are now spending is not enough.

Similarly, when the president demands that the wealthy pay their “fair share” of taxes, what exactly does that mean? Is it merely that top marginal tax rates should be restored to pre-Bush levels? Apparently not. The prevailing notion of “fair” among liberals now appears to include eliminating the preferential tax rate for dividends and capital gains, phasing out the beneficial impact of itemized deductions and removing the cap on income subject to the Social Security tax.

A paper by economists Peter Diamond of MIT and Emmanuel Saez of the University of California at Berkeley now making the rounds in the liberal blogosphere claims to show that the optimal level of marginal taxation of the rich is 73 percent. By “optimal,” Diamond and Saez have in mind a narrow definition: maximizing government revenue. Given the current budgetary constraints, however, many liberals have taken this to mean that we’re leaving huge sums on the table that should be used to help the poor and a middle class that is always and everywhere struggling.

In his 2012 book, “The Road to Freedom,” Brooks of AEI suggests there is a good reason liberals can’t, or won’t, articulate principles that might help put some limits on policies meant to equalize opportunity and provide a safety net, goals he supports. If liberals did so, he argues, it would reveal that a lot of what constitutes our safety-net entitlement programs is not taxing the rich to help the poor; it is taxing the rich to help the middle class and satisfy the urge to equalize not just opportunity but also incomes, an urge that Brooks argues is hard-wired in liberal politics. What, he asks, is the moral justification for that?

Middle-class entitlements, which include a big chunk of programs such as Social Security, Medicare and subsidized college loans, force us to ask: How much income redistribution is enough? Must we keep redistributing until we reach the equality levels of the 1950s, which liberals seem to consider the golden years? Or until the United States matches the income distribution of other industrialized countries? Or until polls show that the middle class believes it has achieved economic security?

The common justification for middle-class entitlements is more political than moral: If we limit safety-net and opportunity-equalizing programs only to the poor and the disabled, over time these would suffer the fate of all welfare programs and gradually be starved of funding. The only way to preserve widespread political support for them, liberals argue, is to extend them to the middle class.

The interesting thing about this argument is that it effectively acknowledges what Romney and the free-market crowd have long suspected: that liberals have been able to create a welfare state only by addicting a middle-class majority to government subsidies — subsidies that now can be financed only by taking more and more money from the rich.

I don’t know if Brooks is right when he says we could reduce the cost of the safety-net and opportunity-equalizing programs by 40 percent if we limited them to the poor and the disabled. But even if he is half-right, a 20 percent reduction would provide a sizable bit of fiscal headroom to strike a different balance between the moral obligation to provide a safety net and the moral obligation to let people keep as much of their hard-earned money as possible.

There remains, however, one glaring problem with the moral case against redistribution. For implicit in the imperative to let the productive keep what they earn is an assumption that the markets distribute income in a way that accurately reflects everyone’s relative economic contribution — and therefore is fair. But is that true?

In an economy of self-sufficient farmers and ranchers, people can point to something and credibly claim, “I produced that” or “I built that.” But in a modern, complex economy, the connection between what is produced and who is responsible for producing it is not so obvious. Modern business is a team sport.

It was only 20 years ago, for example, that wage and salary earners reliably captured about 75 percent of the national income, with the rest going to the providers of capital. But in recent years, labor’s share has fallen closer to 67 percent.

A similar shift in the distribution of rewards has occurred within firms and within industries, with much more of the income captured by superstar performers or those at the top. Fifty years ago, the typical corporate chief executive earned less than 50 times the pay of the average front-line worker. Today, the ratio is closer to 350 to 1.

These shifts suggest that the way markets distribute rewards is neither divinely determined nor purely the result of the “invisible hand.” It is determined by laws, regulations, technology, norms of behavior, power relationships, and the ways that labor and financial markets operate and interact. These arrangements change over time and can dramatically affect market outcomes and incomes.

This poses a dilemma for those making a moral case for free markets. If providers of capital could lay a moral claim to 25 percent of the nation’s income as recently as the early 1990s, why do they have a moral claim to 35 percent today? If the top five executives in a big public corporation could once lay claim to 2 or 3 percent of its profits, what gives them the moral right to 10 percent today? And what possible moral justification could there be for a system in which, for every dollar of increased output resulting from higher worker productivity, a mere 13 cents now goes to the typical worker in higher pay and benefits?

Moral philosophers since Adam Smith have understood that free-market economies are not theoretical constructs — they are embedded in different political, cultural and social contexts that significantly affect how they operate. If there can be no pure free market, then it follows that there cannot be only one neutral or morally correct distribution of market income.

In our current debate over capitalism, too much attention is focused on whether, how or how much to redistribute the incomes that markets have produced, with too little focus on the institutional arrangements that determine how that income is divided up in the first place. Such a focus would take in everything from minimum-wage laws to labor laws to the rules of corporate governance. At this point, the markets’ uneven distribution of income has become so dramatic that it threatens to overwhelm the ability of a progressive tax-and-transfer system to keep up with it.

A useful debate about the morality of capitalism must get beyond libertarian nostrums that greed is good, what’s mine is mine and whatever the market produces is fair. It should also acknowledge that there is no moral imperative to redistribute income and opportunity until everyone has secured a berth in a middle class free from economic worries. If our moral obligation is to provide everyone with a reasonable shot at economic success within a market system that, by its nature, thrives on unequal outcomes, then we ought to ask not just whether government is doing too much or too little, but whether it is doing the right things.

This is a wide-ranging analysis not fully answerable even with the very generous character allotment of the Post. But one of your more interesting statements was: "It was only 20 years ago, for example, that wage and salary earners reliably captured about 75 percent of the national income, with the rest going to the providers of capital. But in recent years, labor’s share has fallen closer to 67 percent." This argument rests persistently at the heart of the argument progressives make for higher taxes.

The statement isn't quite accurate, to start; or, at least misleading. First, you miss innovators, who presumably are among the "labor" cohort that 20 years ago collectively captured 75% of the national income. Today, capital and innovators together may well capture significantly more than the 67% ascribed to capital alone.

And that's perhaps the point. 20 years ago, capital and innovation were far more dependent on non-innovation labor than today, and earlier even more dependent. With increasing automation (consider, as one example, 3-D Printing), the key team-up is becoming capital and innovators, who increasingly produce with less and less commodity labor.

If one accepts these premises, then the disturbing conclusion is obvious: capitalism is working fine to distribute the rewards of production to those who actually produce or underwrite production with risk of capital; and inequalities are mere reflections of the true value of commodity labor, that diminishes with every day.

Of course, this had dramatic social impacts.

It may be that we're edging toward a recognition that BOTH capitalism as we've known it AND a progressivism that seeks to unsustainably even life experiences despite life capacities, rapidly are becoming obsolete. Project fifty years hence, when automation has replaced almost all commodity labor. What do we do with all the PEOPLE? Every economic system we've ever hatched has created immense commodity work with palpable value to soak up the efforts of the vast majority of humanity with no capital and who do not innovate. Yet, for the first time, we're seeing the precipitous and rapid loss in value to commodity labor.

If we eliminate the incentives to risk, capital will not risk -- even Keynes understood that; and if we eliminate the incentives to innovation, we will inevitably get far less innovation. If we confiscate capital to pay for evened life experiences, what happens when the capital is spent? If we enslave innovation, how productive is it likely to be, how "moral" is that action, and how likely is it to continue driving consumption engines with new products and services? Yet, if we starve commodity laborers, WHO will consume sufficiently to keep our economies as currently constituted viable?

THIS is the real issue: what do we do with the billions of people who contribute less and less to production?

We may be arguing fruitlessly about "capitalism" and "progressivism". Neither approach or framework answers these questions, and it may be that we now need to invent something we've never seen before, because we've never before been confronted with this challenge.